Monetary Inflation is Driving Up Prices

We are back among civilized people. People who worry about money, that is.

So, what has happened in the world of money since we were gone?

Not too much, apparently.

U.S. stocks are still down about 7% for the year. The NASDAQ has lost 12%.

The dollar is still near its all-time low against the euro, at $1.57. And the yen, too, is near an all-time high. And gold?

Maybe we were right. Maybe we just had our last chance ever to buy gold for less than $900 an ounce. And maybe what we have now is our last chance to buy it for less than $1,000. The price today is $931.

We are bullistic on gold because we are realistic about human nature. Give someone an opportunity to print money and you can be sure that sooner or later, come what may, he’ll take it.

The feds no longer tell us how much money they’re ‘printing,’ but experts say M3, the broadest measure of new money creation, is higher than 15% per year. Let’s see, money increases at 15% per year… and how fast is the supply of goods and services increasing?

Uh-oh… the IMF says the United States is headed for recession. Some economists think the country is already in recession. What that means is that the supply of goods and services is barely increasing at all. Which means, the extra money has to bid for the EXISTING goods and services.

No need to beat around the bush about it. What this means is that monetary inflation is driving up prices.

The price of oil is $112. Wheat, corn, soybeans, rice – all the grains are near record highs too. Many countries are banning exports. Many are controlling prices. (See below… ) Mexico, for example, has price controls on tortillas.

Of course, the real cause of rising food prices is a falling value of paper money. But only the European Central Bank seems to take its mission to protect the euro seriously – it’s holding rates steady. While the ECB tries to hold the line against inflation, the rest of the world’s central bankers are giving inflation all the slack they can. The Bank of England, following the U.S. lead, cut its key rate yesterday by a quarter-percentage point

Let’s go back to our war analogy. It’s a battle between the forces of inflation and the forces of deflation, we keep saying – one side unstoppable… the other immoveable.

But what kind of war is this? Glad you asked because we were thinking about that very question as we sat in front of the fire up in the mountains yesterday.

The Franco-Prussian war of 1870 was a great war. The French declared war on the Germans, for some reason that no one seems to recall. The Huns attacked, rolled up the French army… and laid siege to Paris. In the city, residents soon had to eat rats and cats to stay alive. Parisians exchanged recipes and made the most of it.

The whole thing was over fairly quickly. The Frogs capitulated, agreed to pay reparations, and the Germans withdrew (keeping the Teuton-speaking area of Alsace.)

It was a nice war because it had a clear winner… and because it was over like a good street brawl, before the cops came. And the Germans were very civilized about it. They didn’t set up bases in France. They didn’t stretch out the war for years… or make the French learn to speak German. They won it fair and square, and then went back to their strudel and frauleins. Which made Europeans think that war was not such a bad thing.

Then, came WWI. Oh la la… this was a war of a different sort. It went on for four years. At enormous cost to everyone… millions of dead… trillions in financial losses…

… and who won? Nobody.

We bring it up because this financial battle looks to us like that kind of war. A war of liquidation… in which people lose money they thought they had – either to inflation or to deflation.

Yesterday, Lehman Bros. (NYSE:LEH) liquidated three of its funds. And, as mentioned above, a big part of the stock market has been liquidated. And housing gains are being liquidated at about 10% per year…

… and remember, inflation liquidates almost everything… including the value of American labor. As consumer prices go up and the dollar goes down, the relative price of American labor falls. The working man is liquidated.

But if this is a WWI kind of war… everyone gets liquidated – investors, lenders, borrowers, consumers, businessmen, householders, working people… everyone. People who worry about money will have less to worry about, in other words.

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.

The Reserve Bank here in Australia has been raising its target rate in recent months, but I notice the bank bill rate is higher. Does this mean the Reserve Bank is still providing ‘liquidity’ to the money market? By making up the difference I mean.

I also noticed that the ‘cash’ rate, is lower than the target rate. Possibly inflationary? Maybe I have no idea?

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